Customer Belt-Tightening Cuts Two Ways At Issuers

The "new frugality" is still very much alive, and nowhere is this more evident than in the major credit card lenders' fourth-quarter results.

Loan losses declined from the previous quarter or stabilized at the top five issuers, as consumers made a concerted effort to pay their debts. But their hesitance to spend or borrow hampered the companies' revenues.

American Express Co. was the notable exception. It reported a nearly threefold increase in quarterly profit due to a sharp drop in credit costs and a slight improvement in cardholder spending. Analysts credited Amex's wealthier clientele, and the company said it's keenly focused on retaining high-balance accounts and purging problematic ones.

"With the equity markets coming back as quick as they did, there was a rebound among wealthier customers, and they started to feel more comfortable spending again," said Scott Valentin, a managing director at FBR Capital Markets. "When there is a recovery, the guy that spends $80,000, he can come back up pretty quick."

(Nevertheless, Valentin cut his profit estimates for Amex and Capital One Financial Corp. Friday; both stocks fell more than the broader market. "The card industry as a whole will shrink due to issuer pullbacks, consumer deleveraging and net chargeoffs," he wrote to clients.)

Despite the industrywide improvement in chargeoffs, most card executives were wary of declaring the end of the harshest cycle in decades, with several issuers forecasting higher loan losses this quarter and beyond.

So long as the economy is bleeding jobs, executives said, Americans will struggle to pay their bills and keep a lid on spending, subduing any growth in card portfolios. The driving force behind credit card losses is unemployment, which stood at 10% in December.

"Until we see a rise in employment numbers or job creation, I don't think we'll see a huge bounce back in consumers paying off their debt and transactions fully returning," said David Parker, an analyst at Lazard Capital Markets.

Revenue at the major issuers either declined or stagnated as demand for credit remained weak, cardholders charged less and the companies gave breaks to their most troubled customers.

For example, Bank of America Corp. said it helped more than 200,000 credit card customers during the fourth quarter by reducing their rates or providing them more affordable payment terms. Its net revenue from credit cards fell about 11% to $7.16 billion.

Many analysts noted that consumers have turned to using their debit cards more than their credit cards as they work to keep debt levels in check. At B of A, for instance, debit card purchases were up 8% during the quarter from a year earlier, while credit card purchases were down 3%.

"As individuals are paying down their balances, they are saving more, and they are using their credit cards less," Parker said.

B of A once again reported the highest chargeoff rate among the top five credit card issuers. On a positive note, the rate of losses declined at the Charlotte company for the first time since 2007.

Delinquencies also improved at B of A. The percentage of loans 30 days or more past due declined for the third straight quarter, dipping to 7.19% from 7.35%.

All told, B of A's global credit card division reported a net loss of $1.03 billion — relatively flat from the third quarter, but dramatically worse than the $9 million loss in the fourth quarter of 2008.

The credit card divisions at Citigroup Inc. and JPMorgan Chase & Co. also lost money for the fourth quarter as credit costs remained high. JPMorgan Chase set aside $4.24 billion to cover credit card losses, down slightly from the previous quarter, but 7% higher than in the fourth quarter of 2008.

The total chargeoff rate was 9.33%, down from 10.3% in the third quarter, though up from 5.56% a year earlier. Much of the improvement reflected a "payment holiday" JPMorgan offered in May, where minimum payments were reduced to nothing for the month. The company said it expects the chargeoff rate to climb back to about 10.5% during the first half.

Capital One Financial Corp. also forecast higher loan losses in 2010, after reporting that its chargeoff rate dipped 5 basis points from the third quarter to 9.59%. Capital One, Citi and JPMorgan Chase all posted higher delinquency rates.

Richard Fairbank, Capital One's CEO, said during a call that higher delinquencies could drive chargeoffs above 11% in the first quarter, but this would likely be the peak. Still, just because unemployment and chargeoffs appear to be nearing their peak, it "doesn't necessarily mean we're nearing the beginning of a robust recovery." He added that declining balances are likely to keep chargeoffs high through 2010. Barring any significant worsening in the economy, however, Fairbank said he expects Capital One's domestic card business to stay profitable this year.

Amex took a hit at the height of the recession early last year as its wealthier clients put the brakes on spending and demand weakened for its cards, which traditionally carried high annual fees. But those high-balance accounts have been the first to improve as the recovery takes hold.

Spending on Amex cards in the U.S. climbed 2% from a year earlier to $115 billion, while average spending per card rose 15% to $3,209. By contrast, JPMorgan Chase said total charge volume fell 9% to $86.9 billion.

Regulation also has taken its toll. Managed card revenue at Citi was down 7% from a year earlier, at $2.4 billion. The decline in revenue was partly due to the Credit Card Accountability Responsibility and Disclosure Act's impact, the company said, as it worked to implement system changes to comply with the new rules, which take effect next month. The CARD Act will continue to weigh on the North American business, Citi said, potentially reducing revenue on a pretax basis by $400 million to $600 million this year.

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